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Aug 02, 2017 10:59 AM IST | Source: CNBC-TV18

RBI Policy: Experts discuss the way forward for market, economy & banks

The Monetary Policy Committee today decided to leave the repo rate unchanged but cut SLR by 50 basis points with no change in held-to-maturity (HTM).

The Monetary Policy Committee today decided to leave the repo rate unchanged but cut SLR by 50 basis points with no change in held-to-maturity (HTM). It also lowered its inflation forecast.

Market experts, economists and bankers -- Abheek Barua Chief Economist, HDFC Bank, Jayesh Mehta MD & Country Treasurer of Bank of America, PK Gupta,MD, State Bank of India, Vinod Kathuria ED, Union Bank of India, Sandeep Shah of Motilal Oswal Pvt Wealth, B Prasanna Hd-Global Markets Group ICICI Bank, Ashwani Gujral of, SP Tulsian of and Ajay Srivastava, as well as Jahangir Aziz Asia Economic Research JPMorgan and KVS Manian of Kotak Mahindra Bank in an interview to CNBC-TV18 discuss in detail the impact of the policy decisions on the market, stocks, business and economy.

Below is the part transcript of the discussion

Anuj: Your key takeaways?

Barua: I am very confused about what they are saying. There are two things that they have said, one, initially when Dr Viral Acharya responded to the query about whether they would cut rates, they said that it has got to be state contingent which means depending on the data that pans out they could even be accommodative. However in response to a later question and this is important and that is why I am not getting carried away with the idea of a policy rate cut, when Latha asked question about what would induce them, he said we have already done these projections. If there is a surprise relative to these projections which is even lower than the pretty low projections they have made already, only then would we see a case for cutting rates.

So, I am not very sure that even if the data flow is benign and is in a lower than what the RBI had earlier projected but if it is in line with its projections it might just stay on hold. So, it is playing it very carefully, it is not giving too much away.

I think there is a bias towards still sort of remaining neutral, to wait and watch and not cut rates in a hurry. Let me remind you that just with the base effect and so on, the inflation trajectory is going to move up unless prices completely collapse. So, if they use that as a reason to say that we are taking a forward looking view and inflation is rising, which is a point that again Dr Acharya made, I think a rate cut is not a done deal yet, certainly not in August.

Latha: What for you is the overall tone going by Acharya’s two points as well as these phrase that, barring absent policy intervention headline inflation is projected in the range of 2-3.5 percent. Dr. Ravindra Dholakia has not agreed to the decision. We don’t know whether he asked for a cut or whether he did not agree to the neutral stance, chances are that he did not agree to the decision, maybe wanted a cut. Putting all this in place, does space open up for a cut?

Barua: Certainly a space opens up for a cut but there is a strong sense or feeling within the MPC, having taken a neutral stance, having highlighted inflation risks in the past, despite some of the data that perhaps is going to look very weak in the coming months, they should be as careful as possible before actually going in for a rate cut.

So, I don’t think given some of the inherent contradictions of the communications both in the policy and the press conference, an August cut is a done deal, a hike is out of the question but we can sort of linger on for a while without the policy rate moving down. Having said that liquidity is the key issue here. With this kind of liquidity sloshing around with asset demand very weak, there could be further transmission to actual lending rates. Perhaps banks could take NIM hits to get their assets moving.

Jayesh Mehta, MD & Country Treasurer, Bank of America

Latha: Barring our policy intervention, inflation will go to 2-3.5 percent indicates that there could be policy intervention. As well, Dr Acharya almost said that. How did you read this and how will you trade the bonds.

A: I still remain with the same view which we had before the policy because though Dr Archarya's answer to two different questions at two different points were slightly confusing wherein once he said accommodative and in second, he says he looked at further downward projection. The way I interpret it is 3.5-4.5 percent and 4.5 is still not 4 percent of March, 2018 target. So if they see that coming in towards 4 percent, that is when we have the rate cut chances. That is the situation.

Latha: That is the second half of the year?

Mehta: That is the second half of the year. That is where we will see, by August we will get some fair grip on what is happening in the second half of the year, will they further bring around the 4 plus in the August policy.

Latha: But definitely the hike is out of the question which was a lingering thought when you read Michael Patra's minutes. So how would you look at bonds now at 6.65 percent?

Mehta: Hike has been off the table from almost first week of March, more pronounced on May 11 when the consumer price index (CPI) number came in. so hike was completely priced out. In fact people were looking at a cut now or maybe August or December and that is where that continues to be there. But as I said, today is more of relief rally. As we go towards the quarter end, we might see some sell off and then people will play for the August policy.

Latha: Home loans will be less expensive for you to give, so you see the rates falling?

Kathuria: Before talking of housing loan rates, I would like to appreciate the concerns of the RBI but at the same time, refer to paragraph 14 last line, GST is not expected to have a material impact on the overall inflation. At the same time if you look at the domestic macro factors then monsoon is expected to be quite good in the current year and crude oil is also within the range of around USD 50 per barrel and it may be so for the next one-two years, plus-minus 5. So these are the favourable factors which will definitely help in the August policy.

Housing loan has to be calculated, what will be the impact but definitely banks will save some capital out of that.

Latha: So you will be able to pass on some of the advantages to the borrower?

Kathuria: It will depend on how much is the advantage but definitely slight saving of the capital will be there.

Latha: Now you would have done the math and the overall mood or tone of the Reserve Bank of India (RBI) also is that they will not be averse to a cut. It is not as if they have promised one and as Jayesh Mehta pointed out the second answer of Acharya was less accommodative than the first answer which was more accommodative. However, there is an overall sense of not being averse to a cut. That plus the home loan munificence, do you see rates falling for home loan borrowers?

Gupta: What they have done really on the home loan borrower’s front actually, the home loans up to Rs 30 lakh, there is no change in the risk weight. There is a slight change in the risk weight for the loans from Rs 30 lakh to Rs 75 lakh. Actually it is the loans above loan-to-value (LTV) ratio of 75 percent where the risk weight has been reduced from 50 percent to 35 percent. Where the major change has happened is actually the loans above Rs 75 lakh where the risk weight has been changed from 75 percent to 50 percent. So, basically it is the large value loans above Rs 75 lakh where there is a substantial change in the interest rates.

What would be the exact impact of it? I think we still need to do an exact calculation. We will probably go back to our asset-liability committee (ALCO) and see how much cut can be done. Yes, definitely as far as the banks are concerned, there is some saving on the capital on account of this and plus of course the standard asset provisioning which moves from 0.4 percent to 0.25 percent.

However, on the other point which Latha made on the cut in the statutory liquidity ratio (SLR) and the held-to-maturity (HTM) remaining at the same level, SLR cut at this point of time given the huge liquidity that is already there in the system, does not really make any impact because I think the banking system as a whole is sitting at more than 7-8 percent excess SLR. HTM, yes, what it does is that the cut in the SLR otherwise would have led to the banks actually starting mark-to-market, that additional 0.5 percent also. By keeping HTM at the same rate it does give the bank a cushion in terms of not marking that to the market. However, I don’t really think it adds anything to the balance sheet of the banks as such.

Latha: Would you say broadly there are chances for rates to ease?

Gupta: Definitely I think -- see for the large value loans, change from a 75 percent risk weight to a 50 percent risk weight definitely is a big change. I think how much does it translate into the real savings for the bank and how do we transmit it, that is something we will definitely look at and we will take a decision on that.

Let me just add one more factor that this is applicable only to the loans that are being sanctioned from today onwards. In fact had they done it on the existing stock of loans which are there in that category, that could have actually led to a lot of existing capital saving itself and then the transmission also would have been much faster. However, definitely on the new loans that are being given in this segment would definitely be helpful actually. So exact impact of it will have to be calculated.

Latha: What are your first thoughts on the policy itself?

Prasanna: It is pretty much on expected lines. The couple of positives are the fact that they have accepted that inflation trajectory or they have acknowledged that inflation trajectory is lower than what they were expecting a couple of months ago primarily because of the fall in the food and vegetable prices falling down as well as core inflation falling. So from that perspective, it is quite positive.

The second is also the fact that I see it as a first part of a two-stage transition from a policy which talked about hike though not in the policy but in the minutes at least to take away the hike expectations, that is the first stage here. So market will probably be now, a little relieved that we are not really talking about a hike in rates right now, A] because of data coming much better and B] because now the RBI has acknowledged that the data has actually come better.

Latha: Therefore, how would you play bonds since you are the originally the bond king, what are you looking at in terms of the bonds trajectory for the ten-year itself?

Prasanna: It is always very difficult to give a trajectory from a medium-term perspective because a whole lot of other things actually affect bond yields, I mean credit policy and outlook from the RBI is only one of them. But, having said that, you have to look at the global factors, how it moves and based on the current assumptions which is that we have a benign global factor, we have a strong emerging market showing in the global markets and we also have data in our favour.

It looks like we would have a kind of a dovish tilt to the bond trajectory. But having said that, RBI has not gone the whole hog to recognise, they still want to see that the reduction in inflation is there to stay. So to that extent, they have run away with a very dovish kind of an expectation. So I do expect bond yields to be in a trajectory between 6.5 percent and 6.75 percent at best.

The saving grace is that I do not think yields go up too much also because as long as the market participants do expect that inflation is going to come down in the first half and also in the second half. And as long as the comfort is there that the RBI is willing to look through what they said earlier and willing to acknowledge the new normal in inflation, it is kind of positive.

Latha: What did you make of Dr Acharya’s statement and how much chances do you see of a cut?

Manian: To put it in a different lingo, basically I think the car was on a reverse gear. They have brought it to the neutral gear now to take it forward now. I think from a fairly hawkish kind of feel that one got in the last policy, this time it is clearly a much more dovish kind of statement you can see. So, I think the probability for a cut in August is definitely gone up significantly from here.

That does not mean the cut will happen; I think with the data poised the way it is and with so much emphasis on the data with RBI having changed their inflation forecast, changed the growth forecast, marginally though, but I think the data from here becomes very important. 45 days from here is -- nowadays lots of things happen in 45 days so I would say the probability for a cut has gone up in August, but doesn’t guarantee a cut in August. That is the way I read the overall policy.

Latha: What is in it for a banker therefore? For you would it be that you have mark to market (MTM) gains, the banking sector in general, what other advantages, does it lure into housing?

Manian: Clearly I think if the markets remain dovish, dovish inclination of the policy means that the rates will be slightly softer and therefore treasury gains are obviously going to happen for banks and the clear thing in the policy is about the home loan. I think the risk weight has been brought down, the provisioning norm has been reduced, standard provisioning norm has been reduced so that is a good thing for home loans.

So, I guess all banks will want to do more home loans than they wanted because home loans as it is the pricing has been so fine on home loans that return on equity (RoE) on that product has always been a challenge. So, these sops actually help improve the RoE on the product and banks will want to do more home loans than they have done in the past.

Latha: What are your key takeaways in terms of rate expectations?

Aziz: Our base line has been that they would keep the neutral stance but go dovish and on the basis of that, we actually had pencilled in a rate cut in August rather than June. The point I had been making to you was that I do not think the data flow prevents the RBI from cutting today itself. That did not turn out to be the case. But if you look at the trajectory of inflation, they are giving us a trajectory which is till the end of the year. And in the end of the year you are comfortably below the 4 percent target.

So I heard what the Deputy Governor had to say in response to you, but it is hard to see when a forward looking central bank shows its own baseline that inflation is going to remain comfortably below its target and then not react it, that seemed a bit odd to me. But I had flagged that to you when we had earlier spoken on the outlook for the policy.

Latha: You will be tempted to buy bonds at current rates? You think people will be?

Aziz: I would say yes. I would say that if I looked globally, we have seen the Fed talks, we have even heard talk about the Fed actually starting to withdraw quantitative easing (QE). Despite that, we have seen the ten-year rally. So from a global perspective, the rate differential has widened in favour of India. And given where growth is, given where inflation trajectory is, it is likely to be that rates will ease off in India and so will inflation. So on the basis of that, yes, I would say so.
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